LDN - Business

Higher-for-longer rate bets lift dollar, sap stocks

[September 07, 2023] By Marc Jones

LONDON (Reuters) - World stocks slid for a third straight day on Thursday with Europe facing its worst run in five years, as new signs of sustained inflationary pressures and rising energy prices boosted the case for higher-for-longer interest rates.

The U.S. dollar was loitering close to its highest point since March against major peers, and touched a fresh 10-month top versus the Japanese yen, the traditional global funding currency where interest rates remain ultra-low.

Blistering-hot Institute for Supply Management (ISM) figures on Wednesday, at their strongest level since February, bolstered bets that the Federal Reserve could lift interest rates again before the end of the year.

Long-term Treasury yields hovered at a two-week high of nearly 4.28% and close to last month's post-financial crisis highs.

In contrast, German industrial numbers on Thursday were weak, showing the growing divide in fortunes. German bund yields shuffled down to 2.63%, although they too were near two-week highs following talk from a number of ECB policymakers in recent days about raising rates again next week.

"The U.S. ISM services number was just amazing really. I felt like ringing them up and asking them to check it," Robert Alster, chief investment officer at Close Brothers Asset Management, said.

"The strength of the U.S. economy is just incredible - so this whole elongated theory (about rates staying higher for longer) has been given legs," he added, saying that the German data had pointed to a "serious slowdown" there.

Brent crude also stayed above $90 a barrel amid tightening supply, adding to inflation worries.

MSCI's broadest index of world stocks was down for a third day although Europe's STOXX 600 index was down for a seventh in a row which if it finishes that way would mark its longest slide since February 2018.

With a number of Fed policymakers speaking later, U.S. S&P 500 stock futures pointed to another 0.4% drop when New York resumes while Asia-Pacific shares had also spent a third day in reverse.

Hong Kong's Hang Seng and an index of mainland Chinese blue chips each dropped around 1.3%. Australia's benchmark lost 1.2% while Japan's Nikkei fell 0.75%, which snapped an eight-session winning streak.

DOLLAR HIGHS

Wall Street stocks had also sold off on Wednesday after U.S. data showed the services sector unexpectedly picked up steam in August, suggesting stubborn inflationary forces.

Traders are still fairly certain that the Federal Reserve will forego a rate increase this month, they put the risk of one by year-end at closer to a coin toss. A rate cut is now not expected until June.

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A man works at the Tokyo Stock Exchange after market opens in Tokyo, Japan October 2, 2020. REUTERS/Kim Kyung-Hoon/File Photo

"The data doesn't flip the script, but it shows the war against inflation hasn't been won," said Kyle Rodda, senior financial markets analyst at Capital.com in Melbourne.

"It all goes back to the discussion of where that magical neutral rate happens to be," he said. "While the markets are still feeling around for where that rate may be, it's going to weigh on equities and support the U.S. dollar."

The dollar index - which measures the currency against six developed-market peers, including the yen and euro - ticked up 0.07% to 104.93. It jumped to the highest since March 15 on Wednesday at 105.03.

The dollar earlier reached its strongest level since Nov. 4 versus the yen at 147.875.

The currency pair tends to move in step with long-term Treasury yields, which stood at 4.29% on Thursday after pushing to their highest since Aug. 23 at 4.306% in the previous session.

"If we get another cycle high in Treasury yields you fear (we) could see another spike in the dollar," Societe Generale strategist Kit Juckes said. "I look at it and think just don't get in the way."

The euro, meanwhile, dropped 0.1% to $1.0716, following its dip to a three-month trough of $1.0703 on Wednesday.

Elsewhere, the People's Bank of China continued its bid to shore up the yuan by again setting strong official midpoints for the currency.

Despite those efforts, the yuan continues to hover on the weaker side of the closely watched 7.3 per dollar level in offshore trading, last changing hands at 7.3332. It sank to the lowest since early November at 7.3490 in the middle of last month, undercut by a rapidly deteriorating property sector and the risk of spillover into broader markets.

China trade data released on Thursday, while not as dire as economists predicted, still showed a nearly 9% slide in exports and a more than 7% drop for imports.

The Australian dollar, which often trades as a proxy for China, its top trading partner, eased 0.26% to $0.6366, keeping it close to this week's 10-month low.

Brent crude futures fell 24 cents to $90.36 a barrel, after a nine-session winning streak. U.S. West Texas Intermediate crude (WTI) futures fell 29 cents to $87.25 after a seven-session gain. [O/R]

(Reporting by Marc Jones; Additional reporting by Kevin Buckland in Tokyo; Editing by Susan Fenton)

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